(FILE) In this picture taken on January 12, 2009, chairman of India's Reliance Industries Mukesh Ambani gestures as he speaks during the innauguration of the Vibrant Gujarat Investment Summit in Ahmedabad. The Supreme Court ruled in favour of billionaire Mukesh Ambani on May 7, 2010, in his dispute with his younger brother over a family agreement to divide the country's richest gas find, his lawyer said. (AFP)
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Supreme Court favours RIL in gas dispute
NEW DELHI/MUMBAI: The Supreme Court has handed out an emphatic victory to Mukesh Ambani’s Reliance Industries (RIL), ruling that it need not supply gas to a company owned by estranged brother Anil at a previously agreed price, putting the profitability of many power plants of the younger sibling under threat and tightening government control over gas pricing.
The ruling is a setback for Anil, chairman of the eponymous Anil Dhirubhai Ambani Group (ADAG), who wants to build more than 10,000 mw of power plants across the country using gas from RIL. But the ruling would help RIL avoid potential losses it might have incurred had it lost the case, forcing it to sell gas at a lower price of $2.34 per million British thermal units (mmBtu) mentioned in the family MoU that formed the basis of the division of RIL in 2005.
In 2007, the government set a price of $4.20 per mmBtu, prompting RIL to say it would not be able to sell at the 2005 price. In a conference call after the verdict, Anil Ambani said he would not file a review petition. The only whiff of a positive outcome for the ADAG chairman was the court’s direction that RIL and Reliance Natural Resources (RNRL) should begin negotiations for a fresh gas supply agreement within eight weeks.
The negotiations, to be initiated by RIL, should end within six weeks from the day the talks begin, the court ruled. Such an agreement would have to be in consonance with government policy, it said. The RNRL scrip crashed 23% while RIL rose in a falling market.
“We direct both the parties to renegotiate to sort out the differences, but within the government’s policy of Gas Utilisation Policy and the EGoM decisions,” said Chief Justice KG Balakrishnan and Justice P Sathasivam in their separate rulings. Another member of the bench, Judge B Sudershan Reddy, said the MoU was not relevant at all, though he too directed the brothers to negotiate again.
The ruling, at its core, strongly reaffirmed the government’s right to set gas prices and to decide on its allocation. It said government policy would prevail over private contracts such as the family settlement, a position that could adversely impact private investment in sectors like minerals where the government is heavily involved.
A mechanism is provided under the PSC between the government and the contractor (RIL, in the present case). The PSC shall over-ride any other contractual obligation between the contractor and any other party," said Justice Sathasivam, writing the majority verdict.
As the case has dragged on through various courts, the government has tightened its control over the sector, not only approving the price but also directing the producer of the gas as to who it should sell to. This has suited RIL in this particular case, though it remains to be seen if the state would be willing to raise prices in line with the international prices.
RIL stressed its fealty to government policies in a statement issued on Friday evening. "The judgement recognises the dominant role of the production sharing contract and has upheld the policies formulated by government under which it has the authority to regulate the production and distribution of natural gas... In view of the judgement, RIL can only sell at the price approved by the government and only to the entities who have been allocated gas under the Gas Utilisation policy," the statement said. One possible outcome of the SC ruling might mean that a similar agreement between state-run utility NTPC and RIL for gas is also under a cloud after the verdict, though the circumstances of that case are somewhat different. NTPC lost nearly 1% to close at Rs 201.65.
Doubts over negotiations
In the post-verdict conference call, the younger Ambani was characteristically pugnacious seizing on some of the court’s observations on the need for a new gas supply agreement.
"The...court has also directed that suitable arrangements for gas supply should not only be suitable for RIL but also the shareholders of RNRL..(we) look forward to ..secure gas supply for the Group’s power plants in line with the Supreme Court order," Mr Ambani said.
But the ground rules for tweaking the MoU is far from clear and could set the stage for further legal tussles, belying hopes of RIL’s lawyer Harish Salve that the ruling from India’s highest court would encourage the warring brothers to put their bitter and seemingly unending feud behind them. "Price of gas has been upheld at $4.20 and there isn’t any change in that. Within that framework, the court has asked the two parties to renegotiate," said Mr Salve, the legal heavyweight who shepherded RIL’s case to a successful conclusion.
But a senior ADAG official said the price of $4.20 was applicable for a five-year period between 2007 and 2012. "Any power plant that we build will come up after that, so the price of $4.20 has no relevance for us," said the official, who spoke on condition of anonymity because of the sensitivity of the matter. "The government would have to eventually fix the price and it is certainly won’t be in a hurry to do so given that our gas-fired power plants are years away."
"RIL will renegotiate the gas supply agreements with RNRL in the manner and within the timeframe stipulated by the court. While the MoU may be kept in mind during the process of renegotiation, it is clearly held that the MoU is not binding," the statement from RIL said.
RIL gains, ADAG stocks crash
The Supreme Court ruling, though a victory for Mukesh Ambani, will not bring much additional monetary benefit for RIL, where investors had already factored in the $4.2-a-unit pricing for all the 80 mmscmd gas from the KG basin. Even in the worst case scenario, it might have had to supply ADAG companies only after 3-4 years when they begin operations.
RIL shares gained 2% to close at Rs 1,033.85 on Friday in a falling market, which sank with the rest of the globe due to the European crisis.
"Cash flows would (have been) negatively impacted by $700 million annually for selling 28 mmscmd of gas at $2.34/mmBtu as against $4.20 per mmBtu," Ambit Capital said in a note to investors.
RIL and its partner in the field, Niko Resources, are forecast to earn $10.63 billion in sales from the gas field. The government may earn $16.57 billion as its share of revenues from the KG-D6 field.
Shares of RNRL and Reliance Power run by Anil crashed as investors began to count the danger of owning stocks without much business. Both the companies’ fortunes were partly tied to the gas supply from RIL.
RNRL crashed 23% to Rs 53 and Reliance Power, which has the record of the biggest initial public offer in the country, tumbled 9% to Rs 140. The stock has lost 69% from its IPO price, adjusted for splits.
Reliance Power planned to build nearly 25,000 mw of power based on the assumptions that it may get gas from RIL at the agreed price. The biggest of them was at Dadri in Uttar Pradesh. In the conference call, though, Anil Ambani reiterated that he was committed to building 8,000 mw of capacity fired by gas, but he did not elaborate.
The ruling could also lead to a bigger blow to RNRL, the company that was supposed to get the gas and trade on it if SC had upheld the lower court ruling. While a favourable ruling would have given it a profit of Rs 3,000 crore a year, the absence of it makes it a near shell company with just some under-developed coal bed methane blocks and petroleum exploration licences.
There are no significant operations in both the segments to forecast revenues or profits, so there are no analyst forecasts.
The ruling dents, at least to some extent, hopes of Anil Ambani to establish a business empire comparable to his brother with power generation at the heart of it. When the brothers split with an agreement brokered by their mother Kokilaben Ambani in 2005, it was agreed that a specified amount of gas would be supplied to the younger Ambani at a particular price for his power plants. Subsequently, Mukesh’s RIL said it will not be able to do so given its agreement with the government on sharing of gas with the government. The matter was then taken to court.
Reliance Industries, the nation’s most valuable company, operates the biggest gas reserves in the Krishna-Godavari basin off the coast of Andhra Pradesh. The field known as KG-D6 has the peak capacity to produce 80 mmscmd. While RIL operates the field, the government decides the price and the quantity to be sold to various customers is laid down in the production sharing agreement. The gas was discovered before the split was formalised.
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Src: Economictimes, DP blog and Business-standard